More Lessons on Selling Your Stocks

When we last chatted, I told you I had consulted a few financial therapists to help me get over a psychological aversion to selling. The therapy seems to have worked. In addition to unloading Acacia Research (symbol ACTG), Nu Skin Enterprises (NUS) and Stone Energy (SGY), I have ousted Chinese Internet company Sohu (SOHU) from my Practical Investing portfolio.

Why? Because I never should have owned Sohu in the first place. Buying Sohu was a rash move. I had read a bullish report by Citron Research, a company that normally pans overvalued stocks. When I’m intrigued by a stock, I’ll typically study a lot of numbers: price-earnings ratio, earnings growth, sales growth and more. But although Sohu was generating revenues, it wasn’t making money, so I couldn’t calculate a P/E. And my ability to judge a Chinese Internet company on the basis of price to sales was nonexistent.

Faulty math. Under normal circumstances, I would have stopped there. But at the time Sohu came to my attention, the performance of my portfolio was neck and neck with my benchmark, and I wanted to hit one out of the park. My thinking went something like this: China equals growth. Internet equals growth. Rapid growth equals big share-price gains. Stop asking questions. Gotta have it.

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It goes without saying that you should not invest like a drunk choosing a tattoo. And like that drunk, I had plenty of time to regret my decision. Over the nearly three years that I owned Sohu, I never quite understood why the stock would jump one day and tank the next. I sold in December at an average price of $49, taking a loss of roughly $1,000. A few weeks later, the stock was at $58. Had I sold then, I’d have earned a profit. The moral of this story is that if you don’t have a sound reason for buying a stock, you’re not going to sell wisely, either.

Few holdings have caused me more angst than Copa Airlines (CPA). I invested in Copa, one of the top airlines in Latin America, in October 2013 at $137 per share. The stock zoomed to $160 within three months, but it has since plunged to $48, largely because of economic problems in the region Copa serves. Several Latin American nations that are heavily reliant on commodity exports are mired in recession. And that has led to empty seats on Copa flights—and sharply lower revenues and profits.

The strong dollar is another challenge. Some 40% of Copa’s revenues are paid in U.S. dollars, and the rest come from a grab bag of Latin American currencies, such as the Venezuelan bolivar, the Colombian peso and the Brazilian real. All three currencies have sunk against the greenback, contributing to the decline in Copa’s earnings (Copa reports its results in dollars).

Worse, the government of Venezuela has been playing “Calvinball” with its exchange rate at Copa’s expense. Calvinball, for those unfamiliar with Bill Watterson’s long-running cartoon strip Calvin and Hobbes, was a game in which the rules changed as you went along. The Venezuelan government, which controls its currency, had promised to convert bolivars at a favorable rate for foreign firms doing business in Venezuela. But it is now threatening to devalue the bolivar, which would dramatically reduce the value of the $427 million in cash that Copa has tied up in the Venezuelan currency. Copa has responded by demanding that dollars be used to buy all tickets sold in Venezuela. But there’s not much it can do about the tickets Venezuelans already purchased using bolivars.

Copa has remained profitable throughout this mess. I expect its stock to rise again. It just may not be this year, and that’s why I’m struggling with the decision of whether (or when) to pull the sell trigger.